Case Note & Summary
The case involves an appeal by the Commissioner of Income Tax against the order of the Income Tax Appellate Tribunal (ITAT) in favor of the assessee, Manjula J. Shah. The assessee, an individual, derived income from business, house property, capital gains, and other sources. In the assessment year 2004-05, she declared total income of Rs.20,92,400/-, which included long-term capital gains from the sale of a residential flat at Chaitanya Towers, Prabhadevi, Mumbai. The flat was originally purchased by her daughter (the previous owner) on 29/1/1993 for Rs.50,48,350/-. By a gift deed dated 1/2/2003, the daughter gifted the flat to the assessee. On 30/6/2003, the assessee sold the flat for Rs.1,10,00,000/- and offered the long-term capital gains to tax. During assessment, the assessee contended that under Section 48 read with Section 49 and Section 2(42A) of the Income Tax Act, 1961, the indexed cost of acquisition should be determined with reference to the cost inflation index for the year in which the cost was incurred, i.e., 1993-94, when the previous owner purchased it. The Assessing Officer, however, opined that under Explanation (iii) to Section 48, the indexed cost of acquisition must be determined with reference to the cost inflation index for the first year in which the asset was first held by the assessee, i.e., 2002-03. The Commissioner of Income Tax (Appeals) upheld the Assessing Officer's view. On further appeal, the ITAT allowed the assessee's appeal, holding that the indexed cost of acquisition should be computed with reference to the year in which the previous owner first held the asset. The Revenue appealed to the High Court. The High Court framed the substantial question of law as whether the indexed cost of acquisition should be computed with reference to the year of the previous owner's first holding or the year of the assessee's acquisition. The court analyzed Section 48, Explanation (iii), and Section 49(1) of the Act. It noted that Section 49(1) deems the cost of acquisition of a gifted asset to be the cost for which the previous owner acquired it. Explanation (iii) to Section 48 defines 'indexed cost of acquisition' as an amount adjusted for inflation using the cost inflation index for the year in which the asset was first held by the assessee or the previous owner. The court held that the phrase 'first held by the assessee or the previous owner' in Explanation (iii) must be read harmoniously with Section 49(1). Since Section 49(1) treats the previous owner's cost as the assessee's cost, the year of first holding should be that of the previous owner. Therefore, the indexed cost of acquisition should be computed using the cost inflation index for the year in which the previous owner first held the asset, i.e., 1993-94. The court dismissed the Revenue's appeal, affirming the ITAT's order.
Headnote
A) Income Tax - Capital Gains - Indexed Cost of Acquisition - Gifted Asset - Under Section 48 Explanation (iii) read with Section 49(1) of the Income Tax Act, 1961, for computing indexed cost of acquisition of a capital asset acquired by gift, the cost inflation index for the year in which the previous owner first held the asset is to be applied, not the year in which the assessee became the owner. The court held that the deeming provision in Section 49(1) treats the cost of acquisition to the previous owner as the cost of acquisition to the assessee, and Explanation (iii) must be read harmoniously to refer to the year in which the previous owner first held the asset. (Paras 1-8)
Issue of Consideration
While computing capital gains arising on transfer of a capital asset acquired by the assessee under a gift, whether the indexed cost of acquisition has to be computed with reference to the year in which the previous owner first held the asset or the year in which the assessee became the owner of the asset.
Final Decision
The High Court dismissed the Revenue's appeal, holding that the indexed cost of acquisition for a capital asset acquired by gift must be computed with reference to the cost inflation index for the year in which the previous owner first held the asset, not the year of the assessee's acquisition. The ITAT's order was affirmed.
Law Points
- Indexed cost of acquisition for capital gains
- Gifted asset
- Section 48 Explanation (iii)
- Section 49(1)
- Section 2(42A)
- Cost inflation index
- Year of first holding by previous owner
